CSED Working Paper # 38

Does Inequality Matter to Individual Welfare? An Initial Exploration Based on Happiness Surveys from Latin America

Abstract

The effect of inequality on individual welfare remains a debated question in economics. A common explanation for these mixed findings is that in Europe and the U.S., inequality can be a signal of income mobility and opportunity as much as it is a signal of injustice. This paper explores the effects of relative income differences, as well as of inequality more broadly defined, on well being in Latin America, the region with the highest inequality in the world. We find that relative income differences have large and consistent effects on well being in the region. Inequality makes those in the highest quintiles roughly 5% happier than the average and those in the poorest quintile 3% less happy, regardless of differences in wealth levels within and across these groups. Our findings support the importance of relative differences in these realms to well being, and suggest that they may be even more important than income-based differences. Inequality and perceived inequality also play a mediating role in the effects of unemployment on well being. In Latin America, inequality seems to be a signal of persistent advantage for the very wealthy and persistent disadvantage for the poor, rather than a signal of future opportunities.

Does Inequality Matter to Individual Welfare?

An Initial Exploration Based on Happiness Surveys from Latin America The effect of inequality on individual welfare remains a debated question in economics. It is a topic where strong normative judgments outweigh the existing empirical evidence, and debate is often acrimonious and polarized. For those who interpret inequality as a sign of opportunity and/or of rewards to productivity, it is difficult to accept that there are negative effects. For those that see inequality as a reflection of persistent disadvantage for particular segments of society, it is hard to see positive elements. And for those who are primarily concerned with the fostering of income growth (and perhaps with the reduction of absolute poverty), inequality is beside the point—a “luxury” problem of sorts.